Economic Science

I have periodically engaged in a discussion with environmentalist writers about the economic approach to climate change and its virtues and shortcomings. Yesterday, I continued this discussion in a Free Exchange post that concluded:

Environmentalists and economists are fundamentally on the same side, supporting the use of data and the scientific method to reach reasonable, peer-reviewed conclusions and appropriate policy recommendations. Their differences are nothing in comparison to the gulf between those who prefer that peer-reviewed research inform a policy debate and those who’d rather cite email forwards. Until a way can be found to convince deniers to appreciate the reality of the situation, inter-disciplinary bickering is mostly a waste of time.

To my surprise, the response from my environmentalist interlocutors was, basically, “you think what economists are doing is scientific?”. David Roberts tweeted:

A discipline where there are so many fundamental disagreements over first principles & such a track record of failures … has a ways to go.

You don’t see phlogiston get debunked & then come back decades later. You don’t see irreducible disagreements b/t the pro & anti-phlogiston.

“On what are you basing this?”, I asked.

I don’t think your repeated resort to argument-by-credentials is serving you as well as you think it is.

But no, I’ve never witnessed the crystalline purity of academic economics. Just the shit show out here in the real world.

This, honestly, made me extremely angry, and there was a long twitter exchange which I said I’d continue tomorrow (today). Rather than put my followers through that, I’m just going to make a few points here. The “phlogiston” comment is revealing. That’s Krugman’s line, and it suggests that David hasn’t spent much time with actual economic literature in forming his critique. He acknowledges in a later tweet; he doesn’t need to know anything about academic economics to know that it’s useless; his observations of the real world are good enough. Obviously, if I made similar comments about climate science I’d be treated as an ignorant buffoon by people like David Roberts. I suspect they’d respond that economics is different from “real science”, but David obviously hasn’t taken the time to learn enough economics to know, one way or the other.

Is economics a science? Let me first associate myself with Adam Ozimek’s comments here. If you want to say that economics isn’t a “hard science”, that might be all right, depending on just what you mean by it. If you mean that economists can’t run lab experiments and can’t predict outcomes as accurately as, say, chemists, then that’s acceptable to me. If you mean that economists have no experiments, or don’t use the scientific method, or something of that nature, then you’re dead wrong. The currency of the economics realm is evidence. When economists do research they form hypotheses, build models, gather data, test the models against the data, and publish their conclusions. If other economists try to get similar results and fail, the original result is called into question.

Economics is quite often effectively predictive. If the supply of one good is disrupted, economists can tell you with great certainty what will happen to demand for complementary goods and substitutes. If supply levels are known and research establishing elasticities has been done, they can tell you even more about what will happen. Their predictions will nearly always be right. And this is true for many aspects of economics. It’s important to note that because economists can’t always run their own experiments, there will tend to be more confidence about theories that focus on things which occur very often. Prices shift constantly, and economists consequently know a LOT about prices. Massive, global economic recessions occur about once a century. There is obviously a lot more uncertainty regarding the theories that describe these events.

Economics struggles with limited data at times. Economists could substantially increase their macroeconomic sample sizes if they had good data on economic activity for all of human history, but unfortunately governments haven’t been collecting data all that long. (Though economic historians have put together respectable careers carefully assembling historical data sets.) The Job Openings and Labor Turnover Survey, which has been the subject of intense study in this recession, only goes back to 2000. But much of the progress of “hard” science has been about improving the available data. These limitations don’t detract from the scientific endeavor at the heart of the economics discipline. Economics is not empty philosophizing or groping in the dark.

Why does it seem to laypeople as though economists can’t agree about anything? I can give you a few reasons. First, Paul Krugman isn’t going to write a column saying, “Here are the many, many things on which both I and my University of Chicago antagonists agree,” and the Journal isn’t going to get Gary Becker to write a column saying, “Indeed, on these many things we see eye-to-eye.” Second, the most riveting economic events are those, like global recessions, that occur infrequently, and about which there is far less certainty than other, more common events. Critics make hay of the fact that economists seem not to have come any closer on these issues in 80 years, but this amounts to no more than academics debating the meaning of the first lab test while they run the second. And third, the stakes of the policy debate are high, and so commentary is passionate and intense. It begins to seem as though economics is riven through by unbridgeable gulfs, and that these gulfs are as yawning now as they’ve ever been.

But that’s not remotely what economics is like. While Krugman and others bash each other in newspapers, thousands of academic economists are gathering in reams of data, playing with new models, and trying, quite civilly, to figure out what we’ve learned from the Great Recession. Meanwhile, many thousands more are focusing on research related to all the other branches of economics — research which continues to yield solid and useful results.

You don’t have to be able to explain dynamic stochastic general equilibrium models to understand these things about economics. You just need to be prepared to approach an important academic discipline with a tiny bit a humility. Obviously, economists could use a good bit more humility themselves. Quite often, their conclusions are not as certain as they think they are. But that doesn’t mean that economists have nothing to contribute; our understanding of many, many crucial problems would be much poorer in the absence of economic analysis. And that is undoubtedly true where climate change is concerned.

A central difference between economics and natural sciences is that the parameters in economic models are thought to be specific to the country or economy of study. So, unlike the Stefan Boltzmann constant or Avogadro’s number or gravitational acceleration g, in standard macroeconomic models the elasticity of capital in production and the value of the Solow residual is thought to vary in accordance with local institutions, patterns of market behavior, and variations in technology. This allows for a lot of tweaking of the model to fit the data.

Another issue is that, despite your comments above, economics papers are generally done retrospectively and only rarely make specific, falsifiable predictions. So, Einstein’s theory of relativity only was important once he used it to predict a bending of the light from the sun, but Ricardian Equivalence has been falsified multiple times, yet is still a widely cited idea. In fact, I was told by a 5th year PhD student in a top economics program that papers that make specific projections are generally frowned upon and one would never go onto the job market with one. Instead, budding economists are encouraged to construct econometric models that predict the results of only marginal changes– seemingly much less given to Popperian falsification.

There are other issues with their discipline that economists are much more cognizant of– the elision of natural capital from computation of GDP, the inconsistent meanings of measures of marginal product or labor productivity, for example– and there are certainly economists who are very serious about epistemological problems with the discipline, but David Roberts is right that such seriousness is nowhere near universal among economists, and lots of them say things that are plain nonsense.

(See Tyler Cowen’s “zero marginal product” arguments, for example.)

Lastly, the kinds of conflict of interest that are discussed in the movie Inside Job, in which big name economists shill for pay from banks, are pretty bad, and can contaminate the larger discipline.

Is economics in worse epistemological shape than medical research? Probably not. Is it worse than chemistry, physics, molecular biology, and even climate science? Yes, most definitely.

I agree with Nick that you haven’t fairly characterized what I was saying, though of course Twitter is limited in that respect. At no point did I say or imply that economics has “nothing to offer.”

I agree with Jacob that there are obvious epistemic problems in economics which aren’t exactly grappled with transparently by the discipline’s public representatives.

And I agree with Caleb that at a certain point, it’s just a matter of grappling with an enormous, complex subject that does not easily submit itself to the quantification and prediction of the hard sciences, at least with our current tools. It may be that microeconomics has lots of solid, well-confirmed principles and predictive models that can capture changes in prices or other shifts at the margins, but of course there’s rarely a period of “normalcy” in which marginal changes are all we care about. (We sure don’t seem to be in one now.) When it comes to what we most care about — grappling with wars, huge, long-tail problems like climate, the decline of natural resources, recent trends like wage stagnation and financialization, etc. — it looks to me, yeah, like economics is doing some groping around in the dark, with different economists offering radically different diagnoses and prescriptions.

Which is fine. It’s a bear of a subject and lots of economists are doing amazing, admirable work on it.

But whether you’ve noticed or not, the discipline and its adherents are pretty widely loathed. Perhaps that’s just the grumbling of rubes who have never taken grad courses in econ and so have no right to complain (even though economists are constantly telling them how to run their country). Perhaps, though, it’s also true that many economists demonstrate an unbelievable arrogance, even in the face of their failures around the recession, their widespread conflict-of-interest issues, their cliquishness and herd instincts, their discipline’s corruption, etc.

Many of the most scathing critiques of economists, including some listed just above, are made by other economists — some of whom have been to grad school and everything! I don’t see how the field is helped by the weird mix of haughty condescension and thin-skinned defensiveness that, in my experience, economics’ defenders frequently display. If they’re going to be out in the political mix, making policy recommendations, telling us how much things are worth and what we can and can’t afford, well, they’re going to have to deal with the rubes. You can’t have it both ways.

Finally, for the record, I, like many others, do read Paul Krugman’s blog, but the phlogiston thing was mine — I had no idea Krugman ever used it. For what it’s worth.

I followed the Twitter discussion and have had similar discussions lately on Social Sciences v. “Hard Sciences.” The comment that most bothered me was the “shit show out here in the real world” comment.

I love the discoveries of astrophysics, but in the real world the areas “Hard Science” interact most with the public are areas like Healthcare (e.g. pharmaceuticals), Food production, Energy Production and pollution. The science driving all of these is heavily influenced by industrial funding that often ends up being controversially tied to the sources of funding.

Climate researchers understand this as it relates to Energy, but need to view it as a problem in their own institutions instead of blaming the field that might study the issue in greater depth.

Economics is quite often effectively predictive. If the supply of one good is disrupted, economists can tell you with great certainty what will happen to demand for complementary goods and substitutes.

One hardly needs to be an “economist” to predict that. Economics predicting the exact same thing non-economists already have predicted is hardly significant. Astrology doesn’t become a science just because astrologers make the successful prediction that the moon will rise tonight.

The methodology of economics is very similar to that of climatology, geology, evolutionary biology, astrophysics, ecology, and probably many other fields that laymen routinely accept as science.

For example, Jacob H. says “Einsteinâ€™s theory of relativity only was important once he used it to predict a bending of the light from the sun”. And this is why physics is a science, and economics is not.
Except that’s exactly how things work in economics: Milton Friedman’s theoretical prediction that the Philips Curve does not hold in the long run suddenly became very important only after stagflation turned his prediction into reality.

So if economics isn’t a science, neither is physics. (Sorry, physics snobs.)

Any field that is largely incapable of running experiments with its subject matter relies on the same basic methodology– build models, test them against the data, and incorporate the rest of your knowledge as best as you can.

The only reason to single out economics from the rest of these fields is personal bias. And, fortunately, psychologists have run plenty of experiments showing that bias is commonplace.
If the data fits…

I think you are totally absolutely wrong. I am an economist. I think that your claim that economics is based on data is nonsense. For one thing, your claim that economics is one field is nonsense.

Yes there are many economists who test theories with data. Many of them, by the way, perform experiments. Others look for natural experiments. Many change their views because of the data. Many admit they were wrong when their predictions are contradicted by the data.

But that is only one part of the profession. There are also economists who consider economics a branch of mathematics. They do not speculate as to whether their economic results correspond to the real world. That’s not the point.

You can look at top economics journals and find many articles which make no reference to data. They are contributions to a theoretical literature whose origin is not based on empirical success. This is simply a fact. I have mystified economists by suggesting that theories should be testable.

Then there is a whole huge literature based on drawing testable implications from a model, testing them, rejecting them and sticking with the model. This is always a problem — it is impossible to test a hypothesis of interest without auxiliary hypotheses. But in this case, the false model is used and its implications are used to advise policy makers. That is the whole model (with auxiliary hypotheses) which has been rejected by the data.

Rejection of a model leads many (probably most) economists to say that models are false by definition and that a false model can nonetheless be useful. What economic hypotheses have been abandoned because they did not fit the data ? I’d like a complete list. It won’t be long. I claim it is empty.

Notice I have avoided the topic of fresh water macroeconomists. They are another breed apart. Their views are much much further from those of Krugman than the average news consumer would ever guess. Their views are so extreme that it is not possible for non economists to believe that they mean what they say (and they rarely say it in public).

Would RBC theory exist if economics where a science? Would it at least be thrown in the garbage bin after the financial crises? Would you have people chattering around about Ricardian equivalence and other quasi-religious beliefs? Would people going on about these things at least lose a lot of credibility within academic circles?

Which economic theories has been rejected the last 30 years? The only example you ever her is the simple Philips curve correlation â€“ but that was hardly a theory â€“ and the theories that explain why that tradeoff sometimes exist certainly hasnâ€™t diapered.

Give me five examples of such, now â€œfalsifiedâ€/rejected, theories and I will believe that economics is a science.

Are there no physicists who deal almost entirely with mathematics? Would string theory exist if physics were a science?
And if physics were a science, would physicists still be teaching blatantly false Newtonian mechanics? Or the ideal gas law? Can you give me five examples of falsified physics theories from the last 30 years?
(By the way, I’m a bit of an economist myself. A person can’t crown himself the authority on this issue because of his academic background, when there are many with similar backgrounds who disagree.)

Ecology has also has its mathematical modelers, who are criticized for being divorced from the real world. Same for evolutionary biology (see Stephen Jay Gould’s criticisms of mathematical evolutionary models, for example).
Are ecologists and evolutionary biologists no longer scientists?

I will agree that there are many economists who are irresponsible when it comes to discussing public policy, but this is not grounds for expelling economics from scientific canon.

Examples of falsified theories (from the last 30 years, just for fun):

In the world of the harder sciences, one finds a strong distinction between “science” and “engineering”; with the former being more focused on descriptive issues–being able to model aspects of the physical world and make predictions, and the latter more on prescriptive ones: what is the correct way to build project X given requirements Y and constraints Z? The line is not as bright as some would like in some cases, but it exists; engineers are generally expected to follow accepted scientific teachings (as well as hew to proper engineering methodology and the public policy and public interest), and scientists are expected to conduct research and expand foundational knowledge, but generally aren’t in the business of building bridges or chemical plants or avionics control systems.

In many engineering disciplines (not all), programs of licensure exist, which may help to enforce the norms and ethics
of the profession; an engineer who uses either discredited or unsubstantiated theory in his work places his career at risk. Making shit up is frowned upon; and among the body of licensed engineers, one doesn’t find very many snake-oil salesmen making outlandish claims.

Perhaps such distinctions might benefit economics as well.

* A firewall between descriptive economics (research) and prescriptive economics (public policy), including (here’s the hard part) a name change for one of the two fields. Given that the name of “economics” is mud with much of the public, my humble suggestion is for the public policy side to keep the name, and the descriptive branch of the field to be called something else, “economic science” for instance.

* I’m not sure if licensure is appropriate for the professional/policy side. Given that the subject matter is inherently more political than questions of how to build a bridge, licensing might become a way to enforce orthodoxy rather than enforce professional norms. OTOH, given the prevalence of snake oil in the profession…

My biggest concern about the profession, whatever its epistemological classification–is that unlike in engineering, peddling economic snake oil is big business: there’s an intense demand for it, from various political actors shopping for intellectual support for self-dealing policies, and seeking to discredit the political programs of opponents. There’s little market for bridges which collapse under load, but there’s an thriving market for policy regimes which look good on paper but have the actual affect of further enriching the plutocracy. Given that the consumers of junkenomics aren’t likely to cooperate with any attempt to clean up the field (and are likely to oppose such tooth and nail), I’m not optimistic, unfortunately.

There are some basic principles that most respectable economists share, but economics is no more a science than political science, the criminal justice system, or accounting.

People use those disciplines as well as economics to attain whatever their personal objectives are to the greatest degree possible.

The scientific method advances understanding to the greatest level possible under prevailing knowledge and new information. There’s never a time where a credible scientist ever says, hey maybe alchemy and astrology had it right. Yet, you have the current state of the economics profession where facts that were settled half a century ago are suddenly trumped by the combined political stupidities of people like Holtz-Eakin, Taylor, Hubbard, Feldstein, Mankiw, Greenspan, Bernanke, who simply believe and encourage the belief that marginal rates for top income earners are the key to short and long term economic growth despite all sorts of evidence that this is a personal belief system, not a scientific fact.

A science deals in facts, economics deals in all sorts of things, some of which happen to be facts under certain conditions in a certain period.

There is value in all sorts of things that aren’t a science. I eat very good restaurant meals that are repetitively prepared by chefs who are not scientists. I buy stock in companies that deliver reliable repetitive results over a long period of time that are not run by scientists.

Economists claiming a higher level of pseudo-science than a lawyer, for example, is just ludicrous. But admittedly, if I could make a similar claim about managing projects to enhance my professional image, increase my earnings potential, and assert a higher level of credibility on issues that were vital to my self-interest I surely would.